Criticism of the Principle of Maximum Social Advantage

Criticism of the Principle of Maximum Social Advantage It must be pointed out, however, that these are only theoretical principles. As a general principle perhaps no exception can be taken to it. But when we come to the actual application, several diff

Criticism of the Principle of Maximum Social Advantage

It must be pointed out, however, that these are only theoretical principles. As a general principle perhaps no exception can be taken to it. But when we come to the actual application, several difficulties crop up:

(i) Difficulty of Measuring Sacrifice and Benefits. We know that public expenditure confers benefits and taxation entails a sacrifice. The Principle of Maximum Social Advantage assumes that the benefits and sacrifices are calculable. This is not a valid assumption since exact measurement in such cases

is out of the question. For example, how can we estimate in quantitative terms benefit resulting from a certain expenditure on education, public health or police? There is no objective measure available for this purpose.

 

Similarly, in the case of a tax, we can at best assess its money burden but not the real burden. Whereas a tax entails a sacrifice it has also several good and bad side-effects. A tax may reduce consumption, but it can also promote saving and investment so as to raise the level of income and employment in the country. It is difficult to measure and balance sacrifices and benefits of taxation. Taxation affects consumption, prices and factor allocation. If all these good and bad effects are borne in mind, it is really impossible to say what have been the benefits and sacrifices to society. Correct measurement of benefits and sacrifices is still more difficult.

 

Besides, in the principle of maximum social advantage, the sacrifices entailed in taxation and benefits conferred by expenditure are sought to be measured in terms of utility, and utility to different individuals is compared. That is, it involves inter-personal comparison of utility. But the well-known

Economist Robbins has declared that the inter-personal comparison of utility is unscientific. Utility is subjective; it cannot be measured and it cannot be compared. Prof. J. R. Hicks has pointed out the shortcomings of cardinal measurement of utility. There is no doubt that it is difficult, nay, impossible to measure the social sacrifice of taxation and public benefit of expenditure. Hence, it is difficult to put into practice the principle of maximum social advantage which is based on measurement of social sacrifice of taxation and public benefits of expenditure in terms of utility.

 

(ii) Impropriety of the Use of Equi-marginal Utility in Public Expenditure.

We know that an individual consumer maximizes his utility from certain expenditure by acting on the law of equi-marginal utility. But this law cannot be extended to public expenditure, since public expenditure is not supposed to benefit particular individuals. Most of the public expenditure confers a collective or social benefit as distinguished from individual benefits, e.g., public expenditure on defense, on general administration, maintenance of law and order, economic development, etc. How much benefit accrues to individuals, cannot be ascertained. Hence, if individual benefits cannot be ascertained, it is impossible to equi-marginalise their utility.

 

(iii) Difficulty arising from the Huge Amounts of Taxation and Expenditure. In the principle of maximum social advantage, it is said that the marginal benefit of public expenditure to various individuals should be equalized and similarly, the marginal sacrifice of taxation of the various individuals should be equalized. But actually it is not possible to equalize marginal units. The State has to spend crores of rupees on education, on public health, on defense, and so on.

It is simply out of the question to equalize their benefits and sacrifices in terms

of marginal units.

(iv) Replacement of the Principle of Maximum Social Advantage by Functional Finance. Most of the modern economists have adopted the concept of functional finance instead of the Principle of Maximum Social Advantage. This is due to the fact that in the principle of maximum social advantage the revenue raised by the government through taxation and public expenditure must be equal. That is, the budget must be a balanced one. But a balanced budget is not necessarily useful for the economy. The great economist, late Lord J.M.

Keynes, showed that during depression, when there is widespread unemployment, it is more beneficial to have a deficit budget. Similarly, in an inflationary situation, surplus budget is called for. Whether the budget should be balanced or surplus or deficit, it depends on the economic conditions prevailing at the time. This means that budget is an instrument for the achievement of certain objectives or it has to fulfill certain functions, e.g., to remove unemployment and

achieve full employment _or to check inflation or to accelerate economic development, and so on. The budget has to be deficit or surplus according to the objectives to be achieved and the taxation and public expenditure policy has to be shaped accordingly.

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